For Coin and Country: Easing Japan-China Tensions Through Social, Economic, and Political Equilibrium

Analysts predict that Shinzo Abe will win his bid for reelection as Japan’s prime minister on Sunday. His relief should be tempered, however, by issues left unresolved by his last term in office. Japan’s relationship with China is one of them. On November 10, Abe shook hands with Chinese President Xi Jinping at the Asia-Pacific Economic Cooperation summit in Beijing (pictured above). But as their ice-cold faces demonstrated, political tensions over territorial and historical disputes between Japan and China remain high. Easing these tensions, which could result in military conflicts and region-wide financial downturn, will require a concerted political, economic, and social effort not only by top-level politicians but by the citizens of both countries as well.

Increasing animosity and hostility between the two countries have led to high levels of political tension in recent years. According to surveys conducted by Genron NPO and China Daily, about 90 percent of citizens in each country currently have an unfavorable or relatively unfavorable impression of the other. In the late 2000s, that viewpoint was held by less than 40 percent. International hostilities rapidly increased because of multiple incidents after the turn of the decade. Most notable among them were a Chinese fishing trawler’s collision with Japanese Coast Guard patrol boats near the Senkaku Islands in 2010; the Japanese government’s nationalization of the Senkaku Islands in 2012, which sparked anti-Japanese demonstrations in China that destroyed multiple Japanese-owned plants and stores; and Prime Minister Abe’s visit in 2013 to Japan’s Yasukuni Shrine, a memorial to Japanese war dead that includes Class-A war criminals from World War II.

These political and social tensions harm the economies of both nations, which are heavily interdependent. According to World Input-Output Database, the contribution of Chinese demand to Japan’s GDP in 2009 was 2.7 percent—as high as that of the United States. Similarly, Japanese demand accounted for 2.1 percent of China’s GDP. This mutual reliance is mostly due to cross-border production networks between the two countries. However, intensifying antipathy amongst their peoples has weakened the countries’ economic relations. Direct investment from Japan to China in the first half of 2014 declined by 49 percent compared with last year’s numbers.

The implications of this issue are not restricted to Japan and China, however. Given that two states are also connected with other East Asian countries through dense production networks (widely referred to as “Factory Asia”), the influence of this tension could spread to the greater regional economy—with disastrous effects. Intra-regional trade within Asia now accounts for one-sixth of total world trade. Moreover, exports from Asia to the rest of the world, mostly to the United States and the European Union, account for 15 percent of the world trade, indicating that consumers around the world benefit significantly from Factory Asia. These vibrant production networks could further develop into knowledge networks, as Japan and China presently rank as the second- and third-most innovative countries in the world measured by their respective numbers of patent applications. In the future, such knowledge networks could create an “Innovation Center Asia” capable of generating sustainable high growth in the region. Ongoing political and social tensions between Japan and China, however, threaten the development of such networks in the region.

Despite being in their mutual economic best interest, stabilizing political relations between Japan and China may not appeal to politicians of either country because such efforts are likely to be hugely unpopular with citizens of both nations. Absent a politically viable option to promote reconciliation, increasing tensions will likely lead politicians in both countries to blame the other for the resultant economic stagnation. This political stalemate will likely reinforce ill will between the two Asian powerhouses, which in turn could promote more economic separation and stagnation. This vicious cycle between political and economic exclusion against foreign countries and economic stagnation has reaped disastrous consequences throughout history. Japan, for example, left the League of Nations in 1933 after its invasion of Manchuria was criticized, which segregated it from Western nations. Japan’s efforts to escape from the resultant economic stagnation led it to further colonize Asian economies, culminating in the Second Sino-Japanese War and, ultimately, in its participation in World War II.

Thus, despite their economic interdependence, there is good reason to fear further political discord—and possible military conflict—between Japan and China. This risk increases because, as a result of Japan’s prolonged economic stagnation over the past two decades, the importance of the Japanese economy to that of China is diminishing. Japan’s share of total Chinese trade value has declined sharply since the turn of the millennium, from 17.5 percent in 2000 to 7.5 percent in 2013. During the same period, however, China’s share of total Japanese trade doubled from 10 percent to 20 percent. The incentive for China to maintain peaceful relations with Japan has thus declined over time in direct proportion to the decline of Japanese economic participation in Chinese markets.

How, then, to reduce current political tensions and avoid military conflict? Expanding free trade agreements (FTAs) in Asia—including the Japan-China-Korea FTA, the Regional Comprehensive Economic Partnership (RCEP), the Trans-Pacific Partnership (TPP), and the Free Trade Area of the Asia-Pacific (FTAAP)—might helpfully enlarge the economic benefits of stabilizing political relations.

But strengthening FTAs is not a sufficient solution. This is because the vicious cycle between political exclusion and economic stagnation can be triggered even under conditions of close economic ties. Researchers at the Ohio State University led by Omar M. G. Keshk have empirically shown that strong trade ties between countries do not necessarily act as a deterrent to military conflicts between them. The experience of Europe in the early 20th century further confirms this conclusion. Though highly integrated through international trade and economic interdependence, the continent nevertheless could not mitigate the political factors that resulted in the outbreak of World War I. Japan and China therefore need more than trade partnerships if they are to remain peaceful.

Face-to-face communication between citizens of the two countries has greater potential to ease interstate tensions than do trade relations alone. Margit Bussmann of the University of Greifswald finds that foreign direct investment (FDI), which is associated with more face-to-face communication than trade, can reduce the risk of military conflicts arising between two states. Thus, facilitating such interactions involving politicians, bureaucrats, military officers, businesspersons, researchers, students, artists, and tourists should not be undervalued as a way to avoid the possibility of military conflict. Although politicians may have little incentive to support such efforts when they consider only their immediate popularity, as argued above, they should be mobilized from a larger perspective for benefits of the whole country. The recent meeting between Prime Minister Abe and President Xi is thus a highly encouraging sign, despite their ice-cold faces, and further high-level political and diplomatic meetings should be expected. In addition, universities could play a leading role in promoting interactions between the two countries through research collaborations and student exchanges, as universities are often less affected by political forces and thus can more easily act as facilitators.

Another way for Japan to ease tension with China might be to stimulate its own internal economic growth such that the two countries become economically rebalanced. “Abenomics,” so-named after the current prime minister, has thus far failed to increase long-term growth because of a lack of effective policies that implement structural changes within the Japanese economy. The Abe administration appears to have a good grasp of what it will take to promote growth, however; it currently lists large-scale deregulation, removing protectionism, promoting entrepreneurship, internationalizing firms, and preventing continued population decreases as key provisions of its “Japan Revitalization Strategy.” By fighting against internal political pressures and implementing policies consistent with this strategy, Japan has the potential to hasten its return to high growth—as well as to more stable political relations with China and other Asian economies. A second term in office may breathe new life into Abe’s efforts to realize these goals.

Ultimately, however, what’s past is prologue. Ten years ago, Japanese and Chinese citizens held far more favorable impressions of one another than they do today. Increased social interactions between the two countries, paired with a Japanese economic recovery, therefore have the capacity to change the conditions of that relationship. Easing China-Japan political tensions would not just avert the possibility of military conflict erupting between them. It would also, in turn, benefit other regional Asian economies as well as the world economy—including the United States—by stabilizing production networks and helping to develop knowledge networks in Asia. But it will be up to Japan and China to recognize this mutual benefit, put their differences aside, reach out, and shake hands.